About Venture Capital (VC)

Starting and growing a business always require capital. There are a number of alternative methods
to fund growth. These include the owner or proprietor’s own capital, arranging debt finance, or
seeking an equity partner, as is the case with private equity and venture capital.

Private equity is a broad term that refers to any type of non-public ownership equity securities that
are not listed on a public exchange. Private equity encompasses both early stage (venture capital)
and later stage (buy-out, expansion) investing. In the broadest sense, it can also include
mezzanine, fund of funds and secondary investing.

Venture capital is a means of equity financing for rapidly-growing private companies. Finance may
be required for the start-up, development/expansion or purchase of a company. Venture Capital
firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg.
IT, infrastructure, health/life sciences, clean technology, etc.). 

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture

capital fundmakes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high

technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round

as growth funding round (also referred as Series A round) in the interest of generating a return through an eventual realization event, such

as an IPO or trade sale of the company. It is important to note that venture capital is a subset of private equity. Therefore all venture capital

is private equity, but not all private equity is venture capital.[1]

In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history

that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or

complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies,

venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership

(and consequently value).

Venture capital is also associated with job creation (accounting for 21% of US GDP),[2] the knowledge economy, and used as a proxy

measure of innovation within an economic sector or geography. Every year there are nearly 2 million business created in the USA, and only

600-800 get venture capital funding. According to the National Venture Capital Association 11% of private sector jobs come from venture

backed companies and venture backed revenue accounts for 21% of US GDP.[3]

Venture capital financing is a type of financing by venture capital: the type of private equity capital is provided as seed funding to early-
stage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A
round) in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company.

The goal of venture capital is to build companies so that the shares become liquid (through IPO or
acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is
consistent with the level of risk taken.

With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of
the company in return for the funding. Equity finance offers the significant advantage of having no
interest charges. It is "patient" capital that seeks a return through long-term capital gain rather
than immediate and regular interest payments, as in the case of debt financing. Given the nature of
equity financing, venture capital investors are therefore exposed to the risk of the company failing.
As a result the venture capitalist must look to invest in companies which have the ability to grow
very successfully and provide higher than average returns to compensate for the risk.

When venture capitalists invest in a business they typically require a seat on the company's board
of directors. They tend to take a minority share in the company and usually do not take day-to-day
control. Rather, professional venture capitalists act as mentors and aim to provide support and
advice on a range of management, sales and technical issues to assist the company to develop its
full potential.

Venture capital has a number of advantages over other forms of finance, such as:
 It injects long term equity finance which provides a solid capital base for future growth.
 The venture capitalist is a business partner, sharing both the risks and rewards. Venture
capitalists are rewarded by business success and the capital gain.
 The venture capitalist is able to provide practical advice and assistance to the company
based on past experience with other companies which were in similar situations.
 The venture capitalist also has a network of contacts in many areas that can add value to
the company, such as in recruiting key personnel, providing contacts in international
markets, introductions to strategic partners, and if needed co-investments with other
venture capital firms when additional rounds of financing are required.
 The venture capitalist may be capable of providing additional rounds of funding should it be
required to finance growth.

Funding

Venture capitalists are typically very selective in deciding what to invest in; as a rule of thumb, a fund may invest in one in four hundred

opportunities presented to it. Funds are most interested in ventures with exceptionally high growth potential, as only such opportunities are

likely capable of providing the financial returns and successful exit event within the required timeframe (typically 3–7 years) that venture

capitalists expect.

Young companies wishing to raise venture capital require a combination of extremely rare, yet sought after, qualities, such as innovative

technology, potential for rapid growth, a well-developed business model, and an impressive management team. VCs typically reject 98% of

opportunities presented to them[citation needed], reflecting the rarity of this combination.

Because investments are illiquid and require 3–7 years to harvest, venture capitalists are expected to carry out detailed due diligence prior

to investment. Venture capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of

reaching an IPO stage whenvaluations are favourable. Venture capitalists typically assist at four stages in the company's development:[20]

 Idea generation;

 Start-up;

 Ramp up; and

 Exit

Because there are no public exchanges listing their securities, private companies meet venture capital firms and other private equity

investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences

and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as

"Speed Venturing", which is akin to speed-dating for capital, where the investor decides within 10 minutes whether s/he wants a follow-up

meeting. In addition there are some new private online networks that are emerging to provide additional opportunities to meet investors.[21]

This need for high returns makes venture funding an expensive capital source for companies, and most suitable for businesses having

large up-front capital requirements which cannot be financed by cheaper alternatives such as debt. That is most commonly the case for

intangible assets such as software, and other intellectual property, whose value is unproven. In turn this explains why venture capital is

most prevalent in the fast-growing technology and life sciences or biotechnology fields.

If a company does have the qualities venture capitalists seek including a solid business plan, a good management team, investment and

passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in

excess of 40% per year, it will find it easier to raise venture capital.

[edit]Financing stages

There are typically six stages of venture round financing offered in Venture Capital, that roughly correspond to these stages of a company's

development.[22]

 Seed Money: Low level financing needed to prove a new idea (Often provided by "angel investors")

 Start-up: Early stage firms that need funding for expenses associated with marketing and product development

 First-Round (Series A round): Early sales and manufacturing funds

 Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit

 Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company

 Fourth-Round: Also called bridge financing, 4th round is intended to finance the "going public" process

Between the first round and the fourth round, venture backed companies may also seek to take "venture debt".[23]

[edit]Venture capital firms and funds

[edit]Venture capitalists

A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are

expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled

investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for

the standardcapital markets or bank loans. Venture capital firms typically comprise small teams with technology backgrounds (scientists,

researchers) or those with business training or deep industry experience.

A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early

stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital

(thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue), and thereby potentially

realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a

given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine

their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are

spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.
Diagram of the structure of a generic venture capital fund

[edit]Structure

Venture capital firms are typically structured aspartnerships, the general partners of which serve as the managers of the firm and will serve

as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited

liability companies, in which case the firm's managers are known as managing members. Investors in venture capital funds are known

as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital,

such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled

investment vehicles, called fund of fund.

[edit]Types

This section contains instructions, advice, or how-to content. The

purpose of Wikipedia is to present facts, not to train. Please
helpimprove this article either by rewriting the how-to content or
by movingit to Wikiversity or Wikibooks. (March 2011)

Depending on your business type, the venture capital firm you approach will differ.[24] For instance, if you're a startup internet company,

funding requests from a more manufacturing-focused firm will not be effective. Doing some initial research on which firms to approach will

save time and effort. When approaching a VC firm, consider their portfolio:

 Business Cycle: Do they invest in budding or established businesses?

 Industry: What is their industry focus?

 Investment: Is their typical investment sufficient for your needs?

 Location: Are they regional, national or international?

 Return: What is their expected return on investment?

 Involvement: What is their involvement level?

Targeting specific types of firms will yield the best results when seeking VC financing. Wikipedia has a list of venture capital firms that can

help you in your initial exploration. The National Venture Capital Association segments dozens of VC firms into ways that might assist you

in your search.[25] It is important to note that many VC firms have diverse portfolios with a range of clients. If this is the case, finding gaps in

their portfolio is one strategy that might succeed.

[edit]Roles

Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to

as "venture capitalists" or "VCs". Typical career backgrounds vary, but broadly speaking venture capitalists come from either an operational

or a finance background. Venture capitalists with an operational background tend to be former founders or executives of companies similar

to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend

to have investment banking or other corporate finance experience.

Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:

 Venture partners – Venture partners are expected to source potential investment opportunities ("bring in deals") and typically

are compensated only for those deals with which they are involved.

 Principal – This is a mid-level investment professional position, and often considered a "partner-track" position. Principals will

have been promoted from a senior associate position or who have commensurate experience in another field such as investment

banking or management consulting.

 Associate – This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an

associate may move up to the "senior associate" position and potentially principal and beyond. Associates will often have worked for

1–2 years in another field such as investment banking or management consulting.

 Entrepreneur-in-residence (EIR) – EIRs are experts in a particular domain and perform due diligenceon potential deals. EIRs

are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host

firm (although neither party is bound to work with each other). Some EIR's move on to executive positions within a portfolio company.
[edit]Structure of the funds

Most venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still

seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on

investments in an existing portfolio. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in

technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any

individual firm or its product.

In such a fund, the investors have a fixed commitment to the fund that is initially unfunded and subsequently "called down" by the venture

capital fund over time as the fund makes its investments. There are substantial penalties for a Limited Partner (or investor) that fails to

participate in a capital call.

It can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. At the

time when all of the money has been raised, the fund is said to be closed and the 10 year lifetime begins. Some funds have partial closes

when one half (or some other amount) of the fund has been raised. "Vintage year" generally refers to the year in which the fund was closed
and may serve as a means to stratify VC funds for comparison. This free database of venture capital funds shows the difference between a

venture capital fund management company and the venture capital funds managed by them.

[edit]Compensation

Main article: Carried interest

Venture capitalists are compensated through a combination of management fees and carried interest(often referred to as a "two and 20"

arrangement):

 Management fees – an annual payment made by the investors in the fund to the fund's manager to pay for the private equity

firm's investment operations.[26] In a typical venture capital fund, the general partners receive an annual management fee equal to up

to 2% of the committed capital.

 Carried interest – a share of the profits of the fund (typically 20%), paid to the private equity fund’s management company as a

performance incentive. The remaining 80% of the profits are paid to the fund's investors[26] Strong Limited Partner interest in top-tier

venture firms has led to a general trend toward terms more favorable to the venture partnership, and certain groups are able to

command carried interest of 25-30% on their funds.

Because a fund may run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the

same time; this lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend

to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely-new generation of technologies and people is

ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than

attempt to simply invest more in the industry or people the partners already know.

[edit]Main alternatives to venture capital

Because of the strict requirements venture capitalists have for potential investments, many entrepreneurs seek seed funding from angel

investors, who may be more willing to invest in highly speculative opportunities, or may have a prior relationship with the entrepreneur.

Furthermore, many venture capital firms will only seriously evaluate an investment in a start-up companyotherwise unknown to them if the

company can prove at least some of its claims about the technology and/or market potential for its product or services. To achieve this, or

even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-finance sweat

equity until they reach a point where they can credibly approach outside capital providers such as venture capitalists orangel investors.

This practice is called "bootstrapping".

There has been some debate since the dot com boom that a "funding gap" has developed between the friends and family investments

typically in the $0 to $250,000 range and the amounts that most Venture Capital Funds prefer to invest between $1 to $2M. This funding

gap may be accentuated by the fact that some successful Venture Capital funds have been drawn to raise ever-larger funds, requiring

them to search for correspondingly larger investment opportunities. This 'gap' is often filled by sweat equity andseed funding via angel

investors as well as equity investment companies who specialize in investments instartup companies from the range of $250,000 to $1M.

The National Venture Capital Association estimates that the latter now invest more than $30 billion a year in the USA in contrast to the $20

billion a year invested by organized Venture Capital funds.[citation needed]

Crowd funding is emerging as an alternative to traditional venture capital. Crowd funding is an approach to raising the capital required for a

new project or enterprise by appealing to large numbers of ordinary people for small donations. While such an approach has long
precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs such as independent film makers, now that social

media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost. Some crowd

funding models are also being applied for startup funding.[21][27]

In industries where assets can be securitized effectively because they reliably generate future revenue streams or have a good potential for

resale in case of foreclosure, businesses may more cheaply be able to raise debt to finance their growth. Good examples would include

asset-intensive extractive industries such as mining, or manufacturing industries. Offshore funding is provided via specialist venture capital

trusts which seek to utilise securitization in structuring hybrid multi market transactions via an SPV (special purpose vehicle): a corporate

entity that is designed solely for the purpose of the financing.

In addition to traditional venture capital and angel networks, groups have emerged which allow groups of small investors or entrepreneurs

themselves to compete in a privatized business plan competition where the group itself serves as the investor through a democratic

process.[28]

Law firms are also increasingly acting as an intermediary between clients that seek venture capital and the firms that provide it.[29]

How does the VC industry work

Venture capital firms typically source the majority of their funding from large investment
institutions such as fund of funds, financial institutions, endowments, pension funds and
banks. These institutions typically invest in a venture capital fund for a period of up to ten
years. 

To compensate for the long term commitment and lack of both security and liquidity,
investment institutions expect to receive very high returns on their investment. Therefore
venture capitalists invest in either companies with high growth potential where they are
able to exit through either an IPO or a merger/acquisition. Although the venture capitalist
may receive some return through dividends, their primary return on investment comes
from capital gains when they eventually sell their shares in the company, typically between
three to five years after the investment. 

Venture capitalists are therefore in the business of promoting growth in the companies they
invest in and managing the associated risk to protect and enhance their investors' capital.
Selecting the VC investors
The members of the Indian Private Equity and Venture Capital Association comprise a number of venture capital firms in
India. The IVCA Directory of Members provides basic information about each member's investment preferences and is
available from the Association.

Prior to selecting a venture capitalist, the entrepreneur should study the particular investment preferences set down by
the venture capital firm. Often venture capitalists have preferences for particular stages of investment, amount of
investment, industry sectors, and geographical location.

An investment in an private, unlisted company has a long-term horizon, typically 4-6 years. It is important to select
venture capitalists with whom it is possible to have a good working relationship. Often businesses do not meet their cash-
flow forecasts and require additional funds, so an investor's ability to invest in additional financing rounds if required is
also important. 

Finally, when choosing a venture capitalist, the entrepreneur should consider not just the amount and terms of
investments, but also the additional value that the venture capitalist can bring to the company. These skills may include
industry knowledge, fund raising, financial and strategic planning, recruitment of key personnel, mergers and
acquisitions, and access to international markets and technology. Entrepreneurs should not hesitate to ask for references
from investors.

What do VC's look for

Venture capitalists are higher risk investors and, in accepting these risks, they desire a higher return on their investment.
The venture capitalist manages the risk/reward ratio by only investing in businesses which fit their investment criteria
and after having completed extensive due diligence.
Venture capitalists have differing operating approaches. These differences may relate to location of the business, the size
of the investment, the stage of the company, industry specialization, structure of the investment and involvement of the
venture capitalists in the companies activities. 

The entrepreneur should not be discouraged if one venture capitalist does not wish to proceed with an investment in the
company. The rejection may not be a reflection of the quality of the business, but rather a matter of the business not
fitting with the venture capitalist's particular investment criteria. Often entrepreneurs may want to ask the venture
capitalist for other firms that might be interested in the investment opportunity.
 
Venture capital is not suitable for all businesses, as a venture capitalist typically seeks :

Superior Businesses
Venture capitalists look for companies with superior products or services targeted at large, fast growing or untapped
markets with a defensible strategic position such as intellectual property or patents.

Quality and Depth of Management

Venture capitalists must be confident that the firm has the quality and depth in the management team to achieve its
aspirations. Venture capitalists seldom seek managerial control, rather they want to add value to the investment where
they have particular skills including fund raising, mergers and acquisitions, international marketing, product
development, and networks.

Appropriate Investment Structure

As well as the requirement of being an attractive business opportunity, the venture capitalist will also seek to structure a
deal to produce the anticipated financial returns to investors. This includes making an investment at a reasonable price
per share (valuation).

Exit Opportunity
Lastly, venture capitalists look for the clear exit opportunity for their investment such as public listing or a third party
acquisition of the investee company.

Once a short list of appropriate venture capitalists has been selected, the entrepreneur can proceed to identify which
investors match their funding requirements. At this point, the entrepreneur should contact the venture capital firm and
identify an investment manager as an initial contact point. The venture capital firm will ask prospective investee
companies for information concerning the product or service, the market analysis, how the company operates, the
investment required and how it is to be used, financial projections, and importantly questions about the management
team. 

In reality, all of the above questions should be answered in the Business Plan. Assuming the venture capitalist expresses
interest in the investment opportunity, a good business plan is a pre-requisite.

Investment Process
The investment process begins with the venture capitalist conducting an initial review of the proposal to determine if it
fits with the firm's investment criteria. If so, a meeting will be arranged with the entrepreneur/management team to
discuss the business plan.

Preliminary Screening
The initial meeting provides an opportunity for the venture capitalist to meet with the entrepreneur and key members of
the management team to review the business plan and conduct initial due diligence on the project. It is an important
time for the management team to demonstrate their understanding of their business and ability to achieve the strategies
outlined in the plan. The venture capitalist will look carefully at the team's functional skills and backgrounds.

Negotiating Investment
This involves an agreement between the venture capitalist and management of the terms of the term sheet, often called
memorandum of understanding (MoU). The venture capitalist will then proceed to study the viability of the market to
estimate its potential. Often they use market forecasts which have been independently prepared by industry experts who
specialise in estimating the size and growth rates of markets and market segments.

The venture capitalist also studies the industry carefully to obtain information about competitors, entry barriers, potential
to exploit substantial niches, product life cycles, and distribution channels. The due diligence may continue with reports
from other consultants. 

Approvals and Investment Completed

The process involves due diligence and disclosure of all relevant business information. Final terms can then be negotiated
and an investment proposal is typically submitted to the venture capital fund’s board of directors. If approved, legal
documents are prepared.

The investment process can take up to two months, and sometimes longer. It is important therefore not to expect a
speedy response. It is advisable to plan the business financial needs early on to allow appropriate time to secure the
required funding. 

Venture Capital Financing Process

As written in the previous paragraph, there are several ways to attract funding. However in
general, the venture capital financing process can be distinguished into five stages;

1. The Seed stage

2. The Start-up stage
3. The Second stage
4. The Third stage
5. The Bridge/Pre-public stage

Of course the stages can be extended by as many stages as the VC-firm thinks it should be
needed, which is done in practice all the time. This is done when the venture did not perform
as the VC-firm expected. This is generally caused by bad management or because the
market collapsed or a bit of both (see: Dot com boom). The next paragraphs will go into
more details about each stage.

The following schematics shown here are called the process data models. All activities that
find place in the venture capital financing process are displayed at the left side of the model.
Each box stands for a stage of the process and each stage has a number of activities. At the
right side, there are concepts. Concepts are visible products/data gathered at each activity.
This diagram is according to the modeling technique founded by Professor Sjaak
Brinkkemper of the University of Utrecht in the Netherlands.
[edit]The Seed Stage

The Seed Stage

This is where the seed funding takes place. It is considered as the setup stage where a
person or a venture approaches an angel investor or an investor in a VC-firm for funding for
their idea/product. During this stage, the person or venture has to convince the investor why
the idea/product is worthwhile. The investor will investigate into the technical and the
economical feasibility (Feasibility Study) of the idea. In some cases, there is some sort of
prototype of the idea/product that is not fully developed or tested.

If the idea is not feasible at this stage, and the investor does not see any potential in the
idea/product, the investor will not consider financing the idea. However if the idea/product is
not directly feasible, but part of the idea is worth for more investigation, the investor may
invest some time and money in it for further investigation.
Example

A Dutch venture named High 5 Business Solution V.O.F. wants to develop a portal which
allows companies to order lunch. To open this portal, the venture needs some financial
resources, they also need marketeers and market researchers to investigate whether there
is a market for their idea. To attract these financial and non-financial resources, the
executives of the venture decide to approach ABN AMRO Bank to see if the bank is
interested in their idea.

After a few meetings, the executives are successful in convincing the bank to take a look in
the feasibility of the idea. ABN AMRO decides to put a few experts for investigation. After
two weeks time, the bank decides to invest. They come to an agreement of investigate a
small amount of money into the venture. The bank also decides to provide a small team of
marketeers and market researchers and a supervisor. This is done to help the venture with
the realisation of their idea and to monitor the activities in the venture.
Risk

At this stage, the risk of losing the investment is tremendously high, because there are so
many uncertain factors. From research, we know that the risk of losing the investment for the
VC-firm is around the 66.2% and the causation of major risk by stage of development is
72%. These percentages are based on the research done by Ruhnka, J.C. and Young, J.E.
[edit]The Start-up Stage
The Start-up Stage

If the idea/product/process is qualified for further investigation and/or investment, the

process will go to the second stage; this is also called the start-up stage. At this point many
exciting things happen. A business plan is presented by the attendant of the venture to the
VC-firm. A management team is being formed to run the venture. If the company has a
board of directors, a person from the VC-firms will take seats at the board of directors.

While the organisation is being set up, the idea/product gets its form. The prototype is being
developed and fully tested. In some cases, clients are being attracted for initial sales. The
management-team establishes a feasible production line to produce the product. The VC-
firm monitors the feasibility of the product and the capability of the management-team from
the Board of directors.

To prove that the assumptions of the investors are correct about the investment, the VC-firm
wants to see result of market research to see whether the market size is big enough, if there
are enough consumers to buy their product. They also want to create a realistic forecast of
the investment needed to push the venture into the next stage. If at this stage, the VC-firm is
not satisfied about the progress or result from market research, the VC-firm may stop their
funding and the venture will have to search for another investor(s). When the cause relies on
handling of the management in charge, they will recommend replacing (parts of) the
management team.
Example

Now the venture has attracted an investor, the venture need to satisfy the investor for further
investment. To do that, the venture needs to provide the investor a clear business plan how
to realise their idea and how the venture is planning to earn back the investment that is put
into the venture, of course with a lucrative return.

Together with the market researchers, provided by the investor, the venture has to
determine how big the market is in their region. They have to find out who are the potential
clients and if the market is big enough to realise the idea.

From market research, the venture comes to know that there are enough potential clients for
their portal site. But there are no providers of lunches yet. To convince these providers, the
venture decided to do interviews with providers and try to convince them to join.

With this knowledge, the venture can finish their business plan and determine a pretty good
forecast of the revenue, the cost of developing and maintaining the site and the profit the
venture will earn in the following five years.
After reading the business plan and consulting the person who monitors the venture
activities, the investor decides that the idea is worth for further development.
Risk

At this stage, the risk of losing the investment is shrinking, because the uncertainty is
becoming clearer. The risk of losing the investment for the VC-firm is dropped to 53.0%, but
the causation of major risk by stage of development becomes higher, which is 75.8%. This
can be explained by the fact because the prototype was not fully developed and tested at
the seed stage. And the VC-firm has underestimated the risk involved. Or it could be that the
product and the purpose of the product have been changed during the development.[2]
[edit]The Second Stage

The Second Stage

At this stage, we presume that the idea has been transformed into a product and is being
produced and sold. This is the first encounter with the rest of the market, the competitors.
The venture is trying to squeeze between the rest and it tries to get some market share from
the competitors. This is one of the main goals at this stage. Another important point is
the cost. The venture is trying to minimize their losses in order to reach the break-even.

The management-team has to handle very decisively. The VC-firm monitors the
management capability of the team. This consists of how the management-team manages
the development process of the product and how they react to competition.

If at this stage the management-team is proven their capability of standing hold against the
competition, the VC-firm will probably give a go for the next stage. However, if the
management team lacks in managing the company or does not succeed in competing with
the competitors, the VC-firm may suggest for restructuring of the management team and
extend the stage by redoing the stage again. In case the venture is doing tremendously bad
whether it is caused by the management team or from competition, the venture will cut the
funding.
Example

The portal site needs to be developed. (If possible, the development should be taken place
in house. If not, the venture needs to find a reliable designer to develop the site.) Developing
the site in house is not possible; the venture does not have this knowledge in house. The
venture decides to consult this with the investor. After a few meetings, the investor decides
to provide the venture a small team of web-designers. The investor also has given the
venture a deadline when the portal should be operational. The deadline is in 3 months.

In the meantime, the venture needs to produce a client-portfolio, who will provide their menu
at the launch of the portal site. The venture also needs to come to an agreement how these
providers are being promoted at the portal site and against what price.

After 3 months, the investor requests the status of development. Unfortunately for the
venture, the development did not go as planned. The venture did not make the deadline.
According to the one who is monitoring the activities, this is caused by the lack of
decisiveness by the venture and the lack of skills of the designers.

The investor decides to cut back their financial investment after a long meeting. The venture
is given another 3 months to come up with an operational portal site. Three designers are
being replaced by a new designer and a consultant is attracted to support the executives’
decisions. If the venture does not make this deadline in time, they have to find another
investor.

Luckily for the venture, with the come of the new designer and the consultant, the venture
succeeds in making the deadline. They even have 2 weeks left before the second deadline
ends.
Risk

At this stage, the risk of losing the investment still drops, because the venture is capable to
estimate the risk. The risk of losing the investment for the VC-firm drops from 53.0% to
33.7%, and the causation of major risk by stage of development also drops at this stage,
from 75.8% to 53.0%. This can be explained by the fact that there is not much developing
going on at this stage. The venture is concentrated in promoting and selling the product.
That is why the risk decreases.[3]
[edit]The Third Stage
The Third Stage

This stage is seen as the expansion/maturity phase of the previous stage. The venture tries
to expand the market share they gained in the previous stage. This can be done by selling
more amount of the product and having a good marketing campaign. Also, the venture will
have to see whether it is possible to cut down their production cost or restructure the internal
process. This can become more visible by doing a SWOT analysis. It is used to figure out
the strength, weakness, opportunity and the threat the venture is facing and how to deal with
it.

Except that the venture is expanding, the venture also starts to investigate follow-up
products and services. In some cases, the venture also investigates how to expand the life-
cycle of the existing product/service.

At this stage the VC-firm monitors the objectives already mentioned in the second stage and
also the new objective mentioned at this stage. The VC-firm will evaluate if the management-
team has made the expected reduction cost. They also want to know how the venture
competes against the competitors. The new developed follow-up product will be evaluated to
see if there is any potential.
Example

Finally the portal site is operational. The portal is getting more orders from the working class
every day. To keep this going, the venture needs to promote their portal site. The venture
decides to advertise by distributing flyers at each office in their region to attract new clients.

In the meanwhile, a small team is being assembled for sales, which will be responsible for
getting new lunchrooms/bakeries, any eating-places in other cities/region to join the portal
site. This way the venture also works on expanding their market.

Because of the delay at the previous stage, the venture did not fulfil the expected target.
From a new forecast, requested by the investor, the venture expects to fulfil the target in the
next quarter or the next half year. This is caused by external issues the venture does not
have control of it. The venture has already suggested to stabilise the existing market the
venture already owns and to decrease the promotion by 20% of what the venture is
spending at the moment. This is approved by the investor.
Risk

At this stage, the risk of losing the investment for the VC-firm drops with 13.6% to 20.1%,
and the causation of major risk by stage of development drops almost by half from 53.0% to
37.0%. However at this stage it happens often that new follow-up products are being
developed. The risk of losing the investment is still decreasing. This may because the
venture rely its income on the existing product. That is why the percentage continuous drop.
[4]

[edit]The Bridge/Pre-public Stage

The Bridge/Pre-public Stage

In general this stage is the last stage of the venture capital financing process. The main goal
of this stage is to achieve an exit vehicle for the investors and for the venture to go public. At
this stage the venture achieves a certain amount of the market share. This gives the venture
some opportunities like for example:

 Hostile take over

 Merger with other companies;
 Keeping away new competitors from approaching the market;
 Eliminate competitors.

Internally, the venture has to reposition the product and see where the product is positioned
and if it is possible to attract new Market segmentation. This is also the phase to introduce
the follow-up product/services to attract new clients and markets.

As we already mentioned, this is the final stage of the process. But most of the time, there
will be an additional continuation stage involved between the third stage and the Bridge/pre-
public stage. However there are limited circumstances known where investors made a very
successful initial market impact might be able to move from the third stage directly to the exit
stage. Most of the time the venture fails to achieves some of the important benchmarks the
VC-firms aimed.
Example

Now the site is running smoothly, the venture is thinking about taking over the competitors’
website happen.nl. The site is promoting restaurants and is also doing business in online
ordering food. This proposal is being protested by the investor, because it may cost a lot of
the ventures’ capital. The investor suggests a merge instead.

To settle down their differences, the venture requested an external party to investigate into
the case. The result of the investigation was a take-over. After reading the investigation, the
investor agrees to it and happen.nl is being taken over by the venture. With the take-over of
a competitor, the venture has expanded its’ services.

Seeing the ventures’ result, the investor comes to the conclusion that the venture still have
not reach the target that was expected, but seeing how the business is progressing, the
investor decides to extend its’ investment for another year.
Risk

At this final stage, the risk of losing the investment still exists. However, compared with the
numbers mentioned at the seed-stage it is far lower. The risk of losing the investment the
final stage is a little higher at 20.9%. This is caused by the number of times the VC-firms
may want to expand the financing cycle, not to mention that the VC-firm is faced with a
dilemma of whether to continuously invest or not. The causation of major risk by this stage of
development is 33%. This is caused by the follow-up product that is introduced.[5]
[edit]

At Last

As mentioned in the first paragraph, a VC-firm is not only about funding and lucrative returns, but it offers also the non-funding issues like

knowledge as well as for internal as for external issues. Also what we see here the further the process goes, the less risk of losing investment the

VC-firm is risking.

Risk of
Stage at which investment made Causation of major risk by stage of development
loss

The Seed-stage 66.2% 72.0%

The Start-up Stage 53.0% 75.8%

The Second Stage 33.7% 53.0%

The Third Stage 20.1% 37.0%

The Bridge/Pre-public Stage 20.9% 33.0%